A week or so ago European Central Bank President Mario Draghi, assured the world that he would have a “roadmap” prepared and ready to present at the December 9th meeting of the EU. Yesterday, Draghi, began to release some of the details to assure the markets and the politicians that the ECB was taking positive action to resolve the issues facing Europe. Yesterday, simultaneously David Cameron was meeting with Sarkozy and Merkel, to pressure them on several matters. One was to reiterate the need for decisions and guidance, no more talks and meetings. He also stressed the need for austerity measures; just bailing out countries would not help Europe. Good budgeting and good finances are required. Cameron also was in serious talks regarding new policies and requirements that the EU would be placing on member states. Cameron wants to make sure that the UK is not given a second seat to France and Germany.
The Central Bank President only assumed his role last month and this is his first appearance and public statement. He called on euro-zone governments to quickly craft a “new fiscal compact,” calling it “the most important element to start restoring credibility.” He added that “other elements might follow, but the sequencing matters.”
“There cannot be a single currency without economic convergence,” he said in the southern French city of Toulon. “Or the euro zone will explode.”
Mario has come intense pressure from politicians to commit to massive purchases of government bonds in order to stabilize yields and give governments time to enact convincing deficit reduction. The ECB bond purchases can bring down countries’ borrowing costs, making it easier for governments to refinance debt.
The European Central Bank so far has resisted the pressure, keeping purchases in the €5 billion to €10 billion ($6.7 billion to $13.4 billion) range each week. This has been enough to keep the borrowing costs of Italy and others from spiraling out of control. Bond yields in country after country, not only the debt-plagued nations on Europe’s southern periphery, have been hitting.
Mr. Draghi stopped short of promising unlimited purchases of euro-zone bonds, as a number of European policy makers have recently demanded, but his comments nevertheless raised the prospect that the ECB is willing to do significantly more.
France and Germany, and euro-zone nations are working on new rules that would make budget discipline binding and enforceable by European authorities—possibly shortcutting the laborious and uncertain process of amending existing treaties. ECB officials welcomed the emergence of such a plan over the weekend, saying it would address “moral hazard” concerns.
Despite Mr. Sarkozy’s statements Thursday, there is still disagreement on how far to go—including between him and Chancellor Merkel. Economists said Mr. Sarkozy’s specific proposals may fall short of Germany’s demands for full fiscal submission to a euro-zone budget supervisor.